Financial creditor's Section 7 application allowed despite interim injunction as debt assignment never materialized

NCLAT Principal Bench set aside the Adjudicating Authority's rejection of Section 7 application filed by financial creditor. The tribunal held that despite an interim injunction by Commercial Court, the financial creditor could continue proceedings against corporate debtor as debt assignment never materialized and original debt remained valid. The court ruled that corporate debtor's liability persisted, and the injunction order did not affect Section 7 proceedings. NCLAT directed Adjudicating Authority to admit the application and initiate CIRP within 30 days, finding debt and default sufficiently proved.

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Issues Involved:
1. Maintainability of Section 7 application against the Corporate Debtor.
2. Impact of the Agreement to Assign dated 15.01.2020.
3. Effect of interim injunction dated 29.09.2021 by the Commercial Court.
4. Jurisdiction of Civil Court under Section 231 of the IBC.
5. Application for deletion of Respondent No.1 from the appeal.

Issue-wise Detailed Analysis:

1. Maintainability of Section 7 Application Against the Corporate Debtor:
The Financial Creditor filed an appeal challenging the rejection of its Section 7 application by the Adjudicating Authority. The Tribunal noted that the Corporate Debtor had availed financial facilities from Federal Bank, which were assigned to the Appellant. Despite an Agreement to Assign with Respondent No.2, the Corporate Debtor continued to be liable for its debts. The Tribunal concluded that the debt and default by the Corporate Debtor persisted, and the Financial Creditor was entitled to pursue the Section 7 application.

2. Impact of the Agreement to Assign Dated 15.01.2020:
The Agreement to Assign was not an assignment agreement but a conditional agreement dependent on the payment of the purchase consideration. The Tribunal highlighted that the full purchase consideration was not paid, and the Agreement to Assign was revoked due to the default by Respondent No.2. Therefore, the debt had not been assigned to Respondent No.2, and the Corporate Debtor remained liable.

3. Effect of Interim Injunction Dated 29.09.2021 by the Commercial Court:
The interim injunction restrained the Appellant from acting on the revocation letter dated 02.03.2020. The Tribunal clarified that this injunction did not affect the maintainability of the Section 7 application, as it was based on the debt and default of the Corporate Debtor, independent of the Agreement to Assign. The Tribunal emphasized that the injunction order did not interdict the continuation of the Section 7 proceedings.

4. Jurisdiction of Civil Court Under Section 231 of the IBC:
Section 231 of the IBC bars civil courts from interfering in matters within the jurisdiction of the Adjudicating Authority. The Tribunal noted that the Section 7 application fell within the jurisdiction of the Adjudicating Authority, and the interim injunction by the Commercial Court could not impede the proceedings under the IBC. The overriding effect of the IBC under Section 238 further supported this position.

5. Application for Deletion of Respondent No.1 from the Appeal:
Respondent No.1, the Corporate Debtor, sought deletion from the appeal. The Tribunal rejected this application, stating that Respondent No.1 was a necessary party in the Section 7 application proceedings.

Conclusion:
The Tribunal allowed the appeal, set aside the order dated 25.01.2024, and directed the Adjudicating Authority to admit the Section 7 application and initiate CIRP against the Corporate Debtor. The Tribunal provided a 30-day window for the Respondent to discharge the debt or enter into a settlement with the Appellant.

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